Citigroup Prepares for a Tough 2020; ICG Revenue Strong

Narrow-moat Citigroup (C) reported weaker earnings in first quarter, which was expected given the impact of the COVID-19 pandemic on the global economy. Revenue was up 12%, as Citigroup saw excellent growth within its institutional clients group segment, which more than offset pressure within its international consumer business. Revenue within North American consumer also held up decently. Expenses were roughly flat, which would have led to solid results for the bank, however, like peers, Citigroup booked a large provisioning charge. While it was expected reserves would increase, it would have been impossible to predict the exact amount of reserves the bank was going to book in preparation for the upcoming downturn. This was the main “unknown” going into earnings, and the bank ended up booking roughly $7 billion in provisioning during the quarter. For context, Citigroup recorded only $8 billion in provisions for all of 2019. Guidance from management was minimal, although they did say they expect net interest income and noninterest income to come under more pressure for the rest of the year. Our big takeaway is losses are, at this point, manageable for Citigroup. Given the bank’s large credit card exposure, we think losses will continue to rise in second quarter and for the rest of the year as COVID-19 plays out. Even with the $7 billion provisioning charge, Citigroup was still solidly profitable during the quarter, with EPS of $1.05--more than enough to cover the quarterly dividend of $0.51. Tangible book value still grew during the quarter. Losses will have to get materially worse before capital becomes a serious issue. After updating our models for the latest results, we are predicting another large reserve build in the second quarter, after which losses begin to level out. We have also incorporated the latest rate cuts and expectations for lower fee income, leading us to a new fair value estimate for Citigroup of $72, down from our previous estimate of $79.